Can the BRICs save the PIIGs?

By Jeff GlekinThe author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Brazil’s limited offer of $10 billion of support for the euro zone is pure posturing aimed at enhancing its status in global finance. But Brasilia’s idea to channel it through the International Monetary Fund has merit. Why, though, limit their efforts to the BRICs? Other large holders of reserves should also join the club.

Brazilian attempts to cajole the rest of the BRICs into supporting the euro zone don’t yet look credible. Neither India nor Russia appears keen. And China may prefer a more unilateral approach.

There is no substitute to the PIIGs getting their own house in order. If that fails, the European Central Bank and the European Financial Stability Facility are leading the efforts to manage the crisis. No euro zone countries are in the world’s top 10 holders of currency reserves, whereas all the BRICs are. So if Europe’s efforts fail, the next best hope to avoid a default could come from a bailout from the large surplus nations. Structuring this through the IMF would have the benefit of reducing risk to the lending countries because IMF financing has priority in any default. It would also bring with it discipline.

In an internal document obtained by Reuters last Friday, IMF staff said the fund had about $390 billion it could comfortably commit to lending without putting its balance sheet at risk. However, the staff warned it might need to lend as much as $840 billion. So some sort of contingency funding arrangement would be advisable. Although the IMF already has the ability to borrow $590 billion from its members, these so-called New Arrangements to Borrow are up for review in November.

A sensible way forward would be to extend these arrangements, with the BRICs contributing disproportionately to the facility. That said, they would be foolish to act alone. Their efforts would be more effective, and look less like political posturing, if they bring other large surplus nations including Japan, Saudi Arabia and even South Korea into the fold.